Value Investing by Tankrich

What drives value of a business – Part 1 – Tankrich 17/06/19, 9)56 PM
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What drives value of a business – Part 1
Here is one page snapshot on what drives value of company (and its ownership parts called shares)
https://www.tankrich.com/2015-40-drives-value-part-1/ Page 1 of 9
(https://i1.wp.com/www.tankrich.com/wp-content/uploads/2015/10/Value-1.png)
In this post I am not going to dig into those valuation parameters as I have detailed post on these parameters in past,
you can read them here (https://www.tankrich.com/value-companies-cera/) and here
(https://www.tankrich.com/2014-48-value-companies-noida/)
We are going on spend some time today on inputs that drives these valuation parameters to draw some conclusion to
refine at the process on how we approach on valuing business
Given we are dealing with 7 input factors this post would be in two parts
Free Cash flows
Let’s draw some inferences
A company which converts its revenue to cash flows higher in proportion to other companies in similar industry
should be valued more
A company which has relatively less cash expense (better credit terms, tax advantage, deferred expenses)
compared to other companies in similar industry should be valued more
A company which has lower capital and maintenance expenses compared to other companies in similar industry
should be valued more
Earnings
A company which has underutilised capacity with an opportunity to operate at full capacity has potential to sell
at higher value when it operates at full capacity
A company which has pricing power will be valued relatively more than companies which don’t have pricing
power
A company which has lower cost structure compared to peers in industry should be valued more
Growth Rates
To ensure we don’t err in valuing in companies, it always better to assume conservative growth assumptions
relative to GDP growth rates and Industry growth rates
Intuitively companies in countries which are growing fast and in growth stage of industrial cycle would be valued
more than others
Discount rates/Cost of Capital/Opportunity Cost
Applying discount rates is a complex art, it’s a number which is very difficult to arrive as discount rates is function of
individual’s opportunity cost, prevailing and future interest rates and current and future AAA bond yield
It is very complex to model a perfect discount rate, So we should rely on scenario analysis with 3-4 rates and then
make best guess
Lower discount rate would increase value so declining interest rates would result in higher value
We will deal with other input variables in next post
Till then please let me know your views in comments below
Related
What drives value of a business - Get a framework to understand Case Study - Value Companies -
Part 2 Value CERA
(https://www.tankrich.com/2015- (https://www.tankrich.com/2015- (https://www.tankrich.com/value
41-drives-value-part-2/) 31-value-drivers/) -companies-cera/)
October 10, 2015 July 18, 2015 November 9, 2014
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5 comments
October 21, 2015 at 1:23 pm

saurabh kurichh says:
yes vivek, ur writing is so much easy to understand.
regarding FCF , some people take cash from operation-cash from investing-cash from finance to be FCF ( FCF= CFO-
CFI-CFF),
in ur writing above its diff. Also may we assume cash from operations to be taken from the cash flow statement of the
company ?
Reply

Vivek Bothra says:
Thanks Saurabh — FCF should be CFO-Capex both of them are their in CF statement, However a better
approximate is Normalised CFO – Normalised Capex – Normalised WC but these involve heavy estimations
and thus errors
Reply
Pingback: 2015.41 What drives Value - Part 2 - Tankrich

Sarin Thomas says:
Very nice write up Vivek, your explanation with graphs and images makes it easy to understand.Thank you very much
Reply
October 5, 2015 at 4:02 am

Vivek Bothra says:
Thanks Sarin
Reply
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What drives value of a business – Part 1 – Tankrich 17/06/19, 9)56 PM

BE COME A SMART INVE STOR

What drives value of a business – Part 1

Free Cash flows

Let’s draw some inferences

Let’s draw some inferences

Let’s draw some inferences

Discount rates/Cost of Capital/Opportunity Cost

We will deal with other input variables in next post

Till then please let me know your views in comments below

investing Value investing value investor

SHAR E THIS W ITH YOU R M ATES

October 21, 2015 at 1:23 pm

yes vivek, ur writing is so much easy to understand.

October 21, 2015 at 4:45 pm

Pingback: 2015.41 What drives Value - Part 2 - Tankrich

October 4, 2015 at 10:36 pm

October 5, 2015 at 4:02 am

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